Investor Lawyers Blog

AARP Offers Older Investors 5 Warning Signs for Avoiding the Next Major Ponzi Scam

Published on: November 15, 2011 | by Shepherd Smith Edwards & Kantas, LLP

The AARP has issued a fraud protection bulletin warning investors how to avoid becoming the victim of whoever happens to be peddling the next Ponzi scheme. Unfortunately, older investors are among the favorite prey of financial fraudsters. According Investor Protection Trusts CEO Don Blandin, one in five people in the 65 and over age group have already been exploited. Millions more are at risk.

To help investors, AARP has put out a description of five red flags warning of a possible financial scam:

1) The broker-adviser tells you that you wouldn’t be able to access your money during a “lock-up” period.

Jefferson County, Alabama Declares Municipal Bankruptcy

Published on: November 15, 2011 | by Shepherd Smith Edwards & Kantas, LLP

In the biggest municipal bankruptcy in this country to date, Alabama’s Jefferson County has sought Chapter 9 bankruptcy protection. The filing comes after the failure of state lawmakers to support an agreement with JPMorgan Chase & Co. (JPM) and other creditors to lower its over $3B debt tied to a sewer system. Now, Jefferson County’s creditors must contend losses in the hundreds of millions of dollars. There is also once more the worry that defaults may go up in the municipal bond market. This sewer-debt crisis has stalled economic progress in Alabama.

The accord that had been tentatively reached with creditors offered $1.1 billion in concessions and yearly sewer-raises of up to 8.2% for the first three years. Lawmakers, however, worried that these terms would take a toll on the poor, while creditors wouldn’t commit in writing to the agreement.

Jefferson County’s leading unsecured creditors are Bayerische Landesbank, a JPMorgan unit, and Depository Trust Co. In addition to sewer debt, the county owes approximately $1 billion. This includes $801M in school-construction bonds and $201M in general-obligation securities.

JPMorgan, which had over $1.2B of the county’s sewer debt as of May, didn’t want Jefferson County to file for Chapter 9. It was just two years ago that the financial firm consented to pay $722M to settle SEC charges that its bankers issued payments to people affiliated with Jefferson County politicians to garner business. Larry Langford, a former county commissioner, was even convicted of receiving bribes.

It is up now to Jefferson County to demonstrated to a federal judge that it cannot cover its bills. It must also set up a plan for how to fulfill its commitments.

Municipal bankruptcies are different from corporate ones in that creditors are not allowed to sell or seize the county’s assets. A trustee also cannot be appointed to run the county. Just recently, Harrisburg, Pennsylvania also filed for bankruptcy. The state capital noted that it had millions of dollars in late bond payments linked to a trash-to-energy incinerator. In August, Central Falls Rode Island filed for bankruptcy protection. The city has nearly $21 million in outstanding debt, not to mention unaffordable pension costs.

Although municipal bankruptcies don’t happen as often as corporate bankruptcies, Jefferson County is the eleventh one this year. Prior to this bankruptcy, the largest one was in 1994 when $1.7B in interest-rate bets losses and approximately $2.2 billion in outstanding debt promoted Orange County, California to file in 1994.

Our securities fraud attorneys are committed to fighting institutional investor fraud by helping municipalities and other clients that have sustained losses recoup their losses.

Jefferson County, Alabama, Votes to Declare Biggest Municipal Bankruptcy, Bloomberg.com, November 9, 2011

Jefferson County, Alabama to file for largest municipal bankruptcy, CNN, November 9, 2011

More Blog Posts:
Jefferson County, Alabama Votes to Settle its $3.14B Bond Debt with JPMorgan and Other Creditors, Institutional Investor Securities Blog, September 7, 2011

UBS Financial Reaches $160M Settlement with the SEC and Justice Department Over Securities Fraud, Antitrust, and Other Charges Related to Municipal Bond Market, Institutional Investor Securities Blog, May 16, 2011

JPMorgan Chase to Pay $211M to Settle Charges It Rigged Municipal Bond Transaction Bidding Competitions, Stockbroker Fraud Blog, July 9, 2011

Hedge Fund Manager Raj Rajaratnam Ordered by SEC to Pay $92.8M Penalty for Insider Trading

Published on: November 12, 2011 | by Shepherd Smith Edwards & Kantas, LLP

In the U.S. District Court for the Southern District of New York, the Honorable Jed S. Rakoff has ordered Raj Rajaratnam to pay a record $92.8 million penalty for insider trading. This is the largest amount any individual has been ordered to pay for this type of securities fraud.

It was just last month that Rajaratnam, the billionaire Galleon Group, LLC co-founder, was sentenced to 11 years in prison and ordered to pay $10 million for his financial scam that garnered $63.8M in illegal gains. He also was forced to forfeit $53.8M. A jury had convicted Rajaratnam of multiple counts of securities fraud and conspiracy for using illegal tips to make trades before news about mergers, earnings, forecasts, and spinoffs became public.

Along with the fines from the criminal case, the penalty for the civil case ups the total of monetary sanctions that Rajaratnam has been ordered to pay to over $156.6 million. The SEC’s civil action also permanently enjoins him from violating sections of the Securities Act of 1933, the Securities Exchange Act of 1934, and Exchange Act Rule 10b-5.

It was in 2009 that the SEC charged Rajaratnam and several others in the insider trading scam. More defendants were named later that year, as well as in 2010. The case against them was part of a wider insider trading probe that has now charged 29 entities and individuals. Securities in over 15 publicly traded companies were involved resulting in more than $90 million in illicit profits or losses avoided.

Last month, the SEC was able to get a final judgment by consent against Galleon Management. The hedge fund is permanently enjoined from violating the federal securities laws’ antifraud provisions. It is also jointly and severally liable for what Rajaratnam has been ordered to pay.

Also in October, the SEC charged Rajat K. Gupta for providing insider trading tips to Rajaratnam. Gupta, who used to be the global head at McKinsey & Co., was on the boards of Procter and Gamble and Goldman Sachs at the time.

Alleged tips included confidential information about P & G and Goldman’s respective quarterly earnings and a $5 million investment that the latter was planning to make in Berkshire Hathaway. These latest charges come now, after the SEC dismissed charges in an earlier administrative proceeding against Gupta for the same alleged misconduct. Gupta also recently pleaded not guilty to insider trading charges, including multiple counts of securities fraud and one count of conspiracy to commit securities fraud.

The New York Times reports that in the last two years, the US government charged 56 people with insider trading. 51 of these individuals have either been convicted or pleaded guilty.

With Gupta’s Arrest, Insider Inquiry Goes Beyond Wall St., NY Times, October 26, 2011
SEC Brings New Charges against Raj Rajaratnam, SEC, October 26, 2011
More Blog Posts:
Galleon Group LLC Co-Founder Raj Rajaratnam Sentenced to 11 Years in Prison Over Insider Trading Scam, Stockbroker Fraud Blog, October 13, 2011
Ex-Goldman Sachs Board Member Accused of Insider Trading with Galleon Group Co-Founder Seeks to Have SEC Administrative Case Against Him Dropped, Institutional Investor Securities Blog, April 19, 2011
Ex-Goldman Sachs Director Rajat Gupta Pleads Not Guilty to Insider Trading Charges, Stockbroker Fraud Blog, October 26, 2011 Continue Reading ›

Former Texan and First Capital Savings and Loan To Pay $4.5M for Alleged Foreign Currency Ponzi Scheme

Published on: November 11, 2011 | by Shepherd Smith Edwards & Kantas, LLP

The CFTC has been able to get a permanent injunction and default judgment against former Houston resident Jeffery Alan Lowrance and First Capital Savings and Loan. As restitution for their involvement in an alleged off-exchange foreign currency Ponzi scam, both will pay $1.2 million in restitution and a civil monetary penalty of $3.3 million. They have been permanently banned from commodity-related activities.

According to the order, Lowrance and First Capital Savings and Loan fraudulently solicited at least three dozen to get involved in forex trading. The two of them allegedly falsely claimed that they were successful traders and promised up to 4.15% monthly returns on their investments. They also are accused of publishing bogus client account statements that showed supposed monthly profits on the financial firm’s Web site. The court said that not only did both Lowrance and First Capital fail to put the money clients gave them into forex trading accounts, but also, they allegedly misappropriated the funds to set up a religious newspaper, support Lowrance’s personal expenses and the expenses of his family members, and pay supposed profits to existing investors. The order mandates that any entity or person that provided Lowrance and his company with domain registration or web hosting services now pull offline any of their Web sites that are soliciting clients to trade forex or commodity futures.

It was the U.S. Attorney’s Office for the Northern District of Illinois that indicted Lowrance for running a $25 million financial scam. In July, the SEC charged him with running a multimillion-dollar Ponzi scheme that defrauded hundreds of investors. Lowrance allegedly raised about $21 million. The investors he targeted lived in over two dozen US states. He enticed investors by claiming to share their Christian values and government views.

The SEC complaint contends that Lowrance and his financial firm told investors they were guaranteed a “predictable” income each month, along with returns as high as 7.15%. Certain clients even received bogus credit letters. Even though by 2008 Lowrance and his company had lost all of the investors funds, between June 2008 and February 2009 he still solicited at least another $1 million from at least three dozen investors.

The SEC is alleging violations of the Securities Exchange Act of 1934, Rule 10b-5 thereunder, and the Securities Act of 1933. It is seeking penalties, disgorgement, and other relief.

Court Orders Jeffery A. Lowrance and His Company to Pay More than $4.5 Million for Operating Foreign Currency Ponzi Scheme, CFTC
SEC CHARGES OPERATOR OF $21 MILLION FOREX PONZI SCHEME, SEC, July 15, 2011
Read the indictment (PDF)

More Blog Posts:
Texas Securities Fraud: SEC Moves to Freeze Assets of Stewardship Fund LP, Stockbroker Fraud Blog, November 5, 2011
Money Laundering Charges Filed Against of Houston Criminal Defense Lawyer Accused of Defrauding Defendants of Over $1M, Stockbroker Fraud Blog, October 28, 2011
Houston Judge Overturns $9.2M Securities Fraud Ruling Against Morgan Keegan, Stockbroker Fraud Blog, October 11, 2011 Continue Reading ›

UBS Settles for $8M SEC Charges Over the Inaccurate Recordkeeping of Short Sales

Published on: November 11, 2011 | by Shepherd Smith Edwards & Kantas, LLP

Less than a month after UBS Securities, LLC agreed to pay $12M to settle Financial Industry Regulatory Authority claims of supervisory failures and violating regulation SHO in securities short sales, the broker-dealer has now consented to an $8M penalty to settle Securities and Exchange Commission charges over poor recordkeeping related to the short sales.

Under Regulation SHO, broker-dealers have to accurately record how it has given out locates. A locate is a determination of that broker-dealer’s representation that it has set up to borrow, already borrowed, or reasonably believes it is able to borrow the security to settle a short sale. The SEC contends that UBS employees regularly attached a lender’s employee name to such locates even though that person had never been contacted to confirm availability. Thousands of locates were sourced this way.

The Commission also claims that at least for the last four years, UBS’s “locate log” inaccurately showed which locates came from direct confirmation with lenders and which ones were based on electronic feeds. (Although broker-dealers employees usually can access the electronic availability feed that lenders send to broker-dealers, they can’t always depend on the feeds and need to get directly in touch with lenders to confirm the security’s actual availability.) The SEC’s probe found that UBS employed practices made it hard to determine whether it had reasonable grounds for granting locates.

While the Commission’s order did not find that the broker-dealer executed short sales without a reasonable grounds for thinking that it could borrow the stock to complete its settlement obligations, it did find that UBS violated sections of Regulation SHO and the Exchange Act. SEC Director George S. Canelllos noted that it is important that regulators be able to know that a firm’s records are accurate and can serve as evidence that the financial firm is complying with the law in addition to safeguarding “against illegal short selling.” With short sales, the security being sold doesn’t belong to the seller. The short seller must either buy or borrow the security to deliver it.

In addition to the $8M penalty, UBS greed to hire an independent consultant that will review the UBS Securities Lending Desk’s policies, practices, and procedures regarding locate requests. By settling, the broker-dealer is not denying or admitting to wrongdoing.

Regulation SHO
Under Regulation SHO, broker-dealers cannot accept short-sale orders in equity securities or a effect a short sale in one unless the dealer or broker has borrowed the security, become involved in an arrangement to borrow it, or has reasonable grounds to believe it can borrow the security to be delivered when due. Documented compliance must come with this requirement. A “locate” shows that the broker-dealer has fulfilled these requirements. It is fairly common for customers to ask for locates from broker-dealers.

With the FINRA case, the SRO contended that it was supervisory failures that allowed UBS’s employees to commit the Regulation SHO violations. Significant deficiencies with UBS aggregation units were also believed to be factors resulting in locate violations and order-marking.

SEC Charges UBS With Faulty Recordkeeping Related to Short Sales, SEC, November 10, 2011

FINRA Fines UBS Securities $12 Million for Regulation SHO Violations and Supervisory Failures, FINRA, October 25, 2011

More Blog Posts:
UBS Fined $12M for Supervisory Failures and Regulation SHO Violations in Securities Short Sales, Institutional Investor Securities Blog, October 25, 2011

UBS Financial Services Fined $2.5M and Ordered to Pay $8.25M Over Lehman Brothers-Issued 100% Principal-Protection Notes, Stockbroker Fraud Blog, April 12, 2011

UBS Trader Charged with Fraud Related to $2B Trading Loss, Stockbroker Fraud Blog, September 23, 2011

SEC and DOJ Charge Two Florida Men With Free Riding Securities Scam

Published on: November 10, 2011 | by Shepherd Smith Edwards & Kantas, LLP

Two Florida men are accused of defrauding investors and broker-dealers by allegedly not telling them that they didn’t have enough money or securities to pay for their stock trades. The US Justice Department is charging Scott Kupersmith with securities fraud and wire fraud, while the Securities and Exchange Commission is charging him and Frederick Chelly with involvement in a front-running scam to trade free of risk at the expense of broker-dealers.

The U.S. Attorney for the District of New Jersey claims that Kupersmith engaged in free riding, which happens if a client sells or purchases securities in a brokerage account while lacking the money or securities to cover the trades. Kupersmith and his associates are believed to have facilitated the securities scam by setting up several brokerage accounts at financial firms in New Jersey and outside the state.

In addition to falsely representing himself as having a personal net worth of approximately $5 million, Kupersmith is also accused of made it appear as if he ran a Manhattan hedge fund with assets of up to $20 million. These misrepresentations allowed him to raise about $500,000 of investor monies, which he then used to cover personal expenses or pay principal and interest payments to earlier investors in this Ponzi-like scam.

The SEC says that Kupersmith and Chelly’s scam caused financial fraud allowed them to make $600K in illegal trading profit while broker-dealers lost more than $2 million as a result. The Commission says that the two men presented themselves as private investors or money managers.

They allegedly set up a number of accounts for corporate entities under their control in brokerage firms while buying/selling the same amount of the same stock in various accounts. Often, this would happen during the course of one day and with the intention of making money from the changes in stock price. The SEC says that Kupermith and Chelly would take the profits from the trades but that when substantial losses were likely, they wouldn’t pay able to cover sales they had asked for, which caused broker-dealers to take the losses.

The two men also falsely made it appear as if they had assets with a third-party custody bank even though they didn’t own the stock that they were selling and often didn’t have enough money to pay for the stock that they did buy. Share sale proceeds were then used to buy the same shares.

The two men used Delivery Versus Payment/Receipt Versus Payment accounts at the broker-dealers to trade. Te financial firms offered these accounts to the two men because they were under the impression that Kupersmith and Chelly had the money to cover their trades.

Read the SEC’s Complaint (PDF)

More Blog Posts:
Former Deloitte Tax LP Partner’s Wife Settles Insider Trading Charges for $1M, Stockbroker Fraud Blog, November 8, 2011
Houston Judge Overturns $9.2M Securities Fraud Ruling Against Morgan Keegan, Stockbroker Fraud Blog, October 11, 2011
Banco Espirito Santo S.A. Settles for $7M SEC Charges Alleging Violations of Investment Adviser, Broker-Dealer, and Securities Transaction Registration Requirements, Institutional Investors Securities Blog, November 5, 2011 Continue Reading ›

Citigroup’s $285M Mortgage-Related CDO Settlement with Raises Concerns About SEC’s Enforcement Practices for Judge Rakoff

Published on: November 9, 2011 | by Shepherd Smith Edwards & Kantas, LLP

In Federal District Court today, Judge Jed S. Rakoff expressed concerns about the $285M securities settlement that Citigroup had reached with the Securities Exchange Commission. The financial firm was accused selling $1B in high-risk mortgage-linked collateralized debt obligation that it allegedly knew were at risk of failing. A federal judge must approve the settlement.

Rakoff is the same judge that wouldn’t approve Bank of America’s $33M securities settlement with the SEC for allegedly misleading investors. He later approved a revised settlement of $150 million.

At today’s hearing over the Citigroup deal, Rakoff said the settlement raises issues of concerns about the SEC’s enforcement practices. Approving the agreement would close the case on regulators’ claims that the financial firm.

While Rakoff has not yet made a decision about whether he will approve the settlement, he did question whether the SEC had any genuine desire to find out exactly what happened rather than just settling up. The SEC allows parties to settle without denying or admitting to any wrongdoing. Rakoff also raised concerns about the banks often break the promise they make when settling that they won’t violate securities laws in the future. This is the fifth time that Citigroup has settled securities claims with the SEC over alleged civil fraud. Rakoff also raised questions about why the bank’s settlement involves just a $95 million penalty when investors’ are estimated to have lost $700 million on the CDO.

Even though Citigroup didn’t jump into subprime mortgage loan packaging, it got involved in the housing boom just as that was reaching its heights As the market collapsed, Citigroup sustained over $30 billion in losses, and the government had to bail the bank out twice.

Last year, the financial firm consented to pay $75 million over allegations that it intentionally didn’t notify investors that their investment in the subprime mortgage market were declining in value when the financial crisis hit. Citigroup has since reorganized its risk management function

Citigroup’s $285M Settlement
The SEC claims Citigroup misled clients over a $1 billion derivatives deal involving Class V Funding III, which is a collateralized debt obligation. Not only did the financial firm select the portfolio but it also bet against it. Investors were not told of Citigroup’s conflicting allegiances and they sustained huge losses. Meantime, Citigroup made $126 million from taking a short position against the CDO’s assets, as well as another $34 million in fees.

Judge in Citigroup Mortgage Settlement Criticizes S.E.C.’s Enforcement, NY Times, November 9, 2011

Judge Dredd may scotch $285M Citi settlement: Attorney, Investment News, November 8, 2011

More Blog Posts:
Citigroup to Pay $285M to Settle SEC Lawsuit Alleging Securities Fraud in $1B Derivatives Deal, Institutional Investor Securities Blog, October 20, 2011

FDIC Objects to Bank of America’s Proposed $8.5B Settlement Over Mortgage-Backed Securities, Stockbroker Fraud Blog, August 30, 2011

Bank of America and Countrywide Financial Sued by Allstate over $700M in Bad Mortgaged-Backed Securities, Stockbroker Fraud Blog, December 29, 2010

Former Deloitte Tax LP Partner’s Wife Settles Insider Trading Charges for $1M

Published on: November 8, 2011 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission says that Annabel McClellan has settled for $1M insider trading allegations that she and her husband gave relatives confidential information about merger deals. Annabel is the wife of Arnold McClellan, who used to be a partner at Deloitte Tax LP where he was head of the mergers and acquisitions teams.

If a federal judge approves the securities fraud settlement, the SEC will dismiss the claims against Arnold. By agreeing to settle, Annabel is not denying or admitting to the securities charges.

Per the SEC, Annabel used confidential information that she got from her husband to tip her brother-in-law James Sander and her sister Miranda. These family members then allegedly used this knowledge to make trades before the transactions (usually involved pending acquisitions and mergers) were announced to the public. This allowed them to make millions in illicit profits.

In addition to the civil penalty, Annabel has agreed to permanent enjoinment from violating Securities Exchange Act of 1934’s Section 10(b) and Rule 10b-5 thereunder. She also earlier pleaded guilty to obstructing the SEC’s probe into the insider trading scam after admitted to making false statements related to the investigation. Annabel maintains that her husband knew nothing about her activities.

The McClellans were charged with insider trading by the SEC last year following a parallel probe by the Commission, the Financial Services Authority (FSA), the Department of Justice (DOJ, and the Federal Bureau of Investigation (FBI). According to the SEC’s complaint, at least seven times between 2006 and 2008, Arnold McClellan revealed confidential information to his wife, who then passed on what she knew to Miranda and James in London.

James, who owns a trading company, would then buy derivative financial instruments. He also took financial positions in US companies that were acquisition targets. When Arnold would find out that some of the deals were not certain, James would liquidate his positions. The Commission says that the trades were closely timed with phone calls made between the two sisters, as well as in-person visits between the couples. By 2008, James allegedly made over £1.5 million from the tips and his financial firm’s clients and colleagues made over £10 million.

Insider Trading
Insider trading hurts the stock market, affects investor confidence, and causes financial harm to the companies whose confidential information was used to benefit a few. Insider trading is a breach of fiduciary duty or another kind of relationship of confidence and trust. The person tipping, the one being tipped, and anyone who has access to the insider information that makes the trade can be charged with insider trading.

Read the SEC Complaint Against the McClellans, SEC
Wife of former Deloitte partner to pay $1 million, SFGate, October 18, 2011
FSA, SEC and DoJ investigation leads to two people being charged by the SEC with insider dealing in the U.S., Financial Services Authority, December 1, 2010

More Blog Posts:
Ex-Goldman Sachs Director Rajat Gupta Pleads Not Guilty to Insider Trading Charges, Stockbroker Fraud Blog, October 26, 2011
Dallas Mavericks Owner Mark Cuban’s Allegations of Misconduct Against the SEC Enforcement Staff are Without Merit, Says Inspector General’s Report, Stockbroker Fraud Blog, October 28, 2011
Insider Trading: Former FrontPoint Partners Hedge Fund Manager Pleads Guilty to Criminal Charges, Institutional Investor Securities Blog, August 20, 2011 Continue Reading ›

Texas Securities Fraud: SEC Moves to Freeze Assets of Stewardship Fund LP

Published on: November 5, 2011 | by Shepherd Smith Edwards & Kantas, LLP

The SEC has gotten emergency order to freeze the assets of James G. “Jay” Temme and Stewardship Fund LP, which he owns. Both are accused of Texas securities fraud, including making false statements to investors that their money was being used to purchase and restructure pools of home mortgages that weren’t performing.

Since 2008, Temme, a Texas resident, and his company allegedly obtained at least $35M from investor groups. At least 31 entities and individual investors were involved in about 16 partnerships. Investors were those who had obtained interests in limited partnerships purportedly set up to invest in non-performing residential mortgages and real properties. Temme allegedly gained their trust by cultivating relationships with others that would vouch for him.

The SEC says that Temme would tell investors that the money was going toward buying “tapes” of nonperforming mortgages. The nonperforming mortgages were then supposed to be turned into performing loans. The buys were supposedly obtained at a discount and returns were to be either determined by principal plus interest payments from homeowners or from the reselling of the underlying properties or mortgages.

Unfortunately, contends the Commission, some of the mortgages that Temme claimed to own were not his. He allegedly generated false documents, issued financial transactions that were not authorized, used the money of new investors to pay off those that had invested earlier, and falsely promised certain investor groups that loans were bought on their behalf. He and Stewardship have also been accused of telling investors that the money that was used to compensate other investors instead going into the purchase of certain properties or mortgages.

Previous attempts to freeze Temme’s assets in the past were reportedly disregarded by him, and he would set up other bank accounts and seek funds from other investors even as others filed securities fraud cases against him. Allegations against Temme and Stewardship include failure to pay promised returns, not properly advising investors about their investments, misappropriating of investor funds, and misrepresenting how the investment proceeds were to used.

The SEC is charging Securities Exchange Act of 1934 and Securities Act of 1933 antifraud provisions. It is seeking:

• Preliminary injunction • Final judgment that includes the permanent enjoining from future violations of the federal securities laws • Financial penalties • Disgorgement of ill-gotten gains
• Prejudgment interest
Read the SEC Complaint

SEC Wins Asset Freeze in Alleged Mortgage Restructuring Scheme, Bloomberg, October 18, 2011

More Blog Posts:
Money Laundering Charges Filed Against of Houston Criminal Defense Lawyer Accused of Defrauding Defendants of Over $1M, Stockbroker Fraud Blog, October 28, 2011
Houston Judge Overturns $9.2M Securities Fraud Ruling Against Morgan Keegan, Stockbroker Fraud Blog, October 11, 2011
Dallas Mavericks Owner Mark Cuban’s Allegations of Misconduct Against the SEC Enforcement Staff are Without Merit, Says Inspector General’s Report, Stockbroker Fraud Blog, October 18, 2011 Continue Reading ›

Banco Espirito Santo S.A. Settles for $7M SEC Charges Alleging Violations of Investment Adviser, Broker-Dealer, and Securities Transaction Registration Requirements

Published on: November 5, 2011 | by Shepherd Smith Edwards & Kantas, LLP

Without denying or admitting to wrongdoing, Banco Espirito Santo S.A. a banking conglomerate based in Portugal, has consented to pay nearly $7M in disgorgement, prejudgment interest, and civil penalties to settle Securities and Exchange Commission allegations that it violated securities transaction, investment adviser, and broker-dealer registration requirements. The bank has also agreed to a bar from future violations, as well as an undertaking that it pay a minimum interest rate to US clients on securities bought through BES.

According to the SEC, between 2004 and 2009 and while not registered as an investment adviser or broker-dealer in the US, BES offered investment advice and brokerage services to about 3,800 US resident clients and customers. Most of them were immigrants from Portugal. Also, allegedly the securities transactions were not registered even though they did not qualify for a registration exemption.

The SEC says that by acting as an unregistered investment adviser and broker-dealer BES violated sections of the Exchange Act and the Advisers Act. The bank violated the Securities Act when it allegedly sold and offered securities in this country without registration or the exemption.

The SEC says BES used its Department of Marketing, Communications, and Customer Research in Portugal to send out marketing materials to clients outside the country. Customers in the US ended up getting materials not specifically designed for US residents. BES also worked with a customer service call center to service its US customers. Via phone, these clients were offered securities and other financial products. The representatives were not registered as SEC broker-dealers and had no US securities licenses even though they serviced US clients. US Customers were also offered brokerage services through ESCLINC, which is a money transmitter service in Rhode Island, Connecticut, and New Jersey. ESCLINC acted as a contact point for the investment and banking activities of BES’s US clients.

Registration Provisions
The SEC has set registration provisions in place to help preserve the securities markets’ integrity as well as that of the financial institutions that serve as “gatekeepers,” said SEC New York regional office director George S. Canellos. He accused BES of “brazenly” disregarding these provisions.

State securities laws and US mandate that investment advisers, brokers, and their financial firms be registered or licensed. You should definitely check to make sure that whoever you are investing with or seeking investment advice from his properly registered. It is also important for you to know that doing business with a financial firm or a securities broker that is not registered can make it hard for you to recover your losses if that entity were to go out of business and even if the case is decided in your favor (whether in arbitration or through the courts.)

More Blog Posts:

EagleEye Asset Management LLC Sued by SEC and CFTC for Alleged Forex Trading Scam, Stockbroker Fraud Blog, September 28, 2011